Fourth Circuit Holds Taxpayer Liable for Willful FBAR Penalty (10/21/20; 11/3/20)

In United States v. Horowitz, ___ F.3d ___, 2020 U.S. App. LEXIS 33074 (4th Cir. 2020), here, the Fourth Circuit held that the taxpayer, who joined OVDP and opted out, was subject to the willful FBAR penalty.  On the issues presented, the Court held:

1. The Court applied the expansive definition of willfulness that has taken hold to mean recklessness, a standard significantly less stringent than the Cheek standard applicable to tax and FBAR crimes that the taxpayer must specifically intend to violate a known legal duty.  In the course of this holding, the court rejected the taxpayers’ argument that finding willfulness only from a false declaration to the Schedule B foreign account question would eviscerate the two tier willful and nonwillful FBAR penalty regime.  In this case, of course, there was more to support willfulness than just the Schedule B false answer.  (My experience is that, with good facts, a no answer or a blank answer to the foreign account question can still avoid for the willful penalty.)
2. The Court rejected the argument that the regulations which had not been updated to include the change in the maximum willful penalty from $100,000 to 50% of the amount in the account barred an FBAR willful penalty exceeding $100,000.  Readers will recall that a couple of early cases so held, but since there the clear trend is to reject the argument.
3. The Court rejected the argument that the penalty had been abated (or the assessment reversed) and thus was not properly assessed.  The facts show some administrative confusion about that, but the Court concluded that the assessment stood and was timely.  [Added 11/3/20 10:00am:  Les Book has an excellent discussion of this aspect of the opinion:  Leslie Book, Circuit Court Weighs in on Meaning of Willfulness, Maximum Penalty and SOL Issues in Important FBAR Case (Procedurally Taxing Blog 11/3/20), here.]

JAT Comments:

1. This shows the risk of opting out of OVDP.  OVDP has been discontinued, but a similar risk is encountered in making the decision to join the Streamlined program which requires a certification of nonwillfulness with supporting narrative facts.  Streamlined was designed in party to avoid having to join OVDP and opt out.  But willful actors take the chance of opt out or attempting a Streamlined disclosure.

Items 2, 3 and 4 were added on 11/3/20 at 10:00am:

2.  I updated item #3 in the main body of the blog entry to note Les Book's blog on that aspect of the opinion.  Basically,  the issue is whether an act that might be characterized as an abatement of the assessment vitiates the assessment and thus requires re-assessment which must be within the applicable statute of limitations.  That issue arises for tax assessments.  I summarize my understanding of the tax authority in my Federal Tax Procedure book (Practitioner edition pp. 199-200 (footnotes omitted) and Student edition p. 137): 

The IRS may abate an unpaid assessment that is “(1) is excessive in amount, or (2) is assessed after the expiration of the period of limitation properly applicable thereto, or (3) is erroneously or illegally assessed.”  § 6404(a).  The IRS may also abate for collection factors (e.g., the size of the unpaid assessment makes collection action inappropriate or the IRS compromises the assessment for less than the amount paid). 

An abatement may occur simply from administrative mistake.  What is the effect of an abatement caused by mistake?  Can the IRS simply reverse the abatement, thereby reinstating the pre-abatement assessment amount?  Or must the IRS make a new assessment which may then be prohibited because outside the statute of limitations for assessment? 

The law is not clear.  The line that seems to be drawn is:  If the abatement was just an administrative error (e.g., in the case of posting another taxpayer's payment), then the error can be corrected without a reassessment.  If, however, the abatement was affirmatively intended by the IRS as a substantive redetermination of the taxpayer’s liability (even if the IRS’s determination is wrong), the abatement wipes out the predicate assessment, the wiped-out assessment cannot be revived, and a new timely assessment (with the predicate notice of deficiency) must be made if the statute of limitations on assessment remains open.

This discussion focuses upon the administrative "intent" in making the abatement which seems to invoke subjective factors.  As Les notes, however:

The Fourth Circuit emphasized that even if there were any subjective misunderstanding surrounding the legal effect of its data base deletion it concluded as a “matter of law” that the “mere act of deleting that date did not have the legal effect of reversing the assessments that had been formally certified … on June 13, 2014. Accordingly, the civil penalties against the Horowitzes were timely assessed, and the enforcement action was timely filed.”

4.  The assessment in issue in Horowitz is an FBAR assessment rather than a tax assessment.  That raises the issue of whether tax assessments are sufficiently like FBAR assessments that the authority for the tax assessments can apply to FBAR assessments on this key issue.  I have not researched that issue fully, but it seems to me that assessments in both contexts are sufficiently alike -- merely recording the liability on the Government's books so that collection action can commence -- that authority in one context applies in the other.  As I say in the Federal Tax Procedure book (Practitioner edition p.  611; Student edition p. 423): "The act of assessment is the formal recording on the IRS's books that the taxpayer has a tax due that has not been previously assessed.  § 6203."  Footnote 2564 of the Practitioner edition discusses further:

Laing v. United States, 423 U.S. 161, 171 n.13 (1976).  In Hibbs v. Winn, 542 U.S. 88, 100 (2004), the Supreme Court described assessments (cleaned up):

As used in the Internal Revenue Code (IRC), the term “assessment” involves a recording of the amount the taxpayer owes the Government. 26 U.S.C. §6203. The “assessment” is essentially a bookkeeping notation. Section 6201(a) authorizes the Secretary of the Treasury “to make . . . assessments of all taxes . . . imposed by this title.” An assessment is made “by recording the liability of the taxpayer in the office of the Secretary in accordance with rules or regulations prescribed by the Secretary.” §6203. n2 See also M. Saltzman, IRS Practice and Procedure ¶10.02, pp. 10-4 to 10-7 (2d ed. 1991) (when Internal Revenue Service signs “summary list” of assessment to record amount of tax liability, “the official act of assessment has occurred for purposes of the Code”).

   n. 2 Section 301.6203-1 of the Treasury Regulations states that an assessment is accomplished by the “assessment officer signing the summary record of assessment,” which, “through supporting records,” provides “identification of the taxpayer, the character of the liability assessed, the taxable period, if applicable, and the amount of the assessment.” 26 C.F.R. §301.6203-1 (2003). 

I did not include in the quoted footnote another footnote from Hibbs that may be relevant to the issue.  That footnote is as follows:

   n3 The term "assessment" is used in a variety of ways in tax law. In the property-tax setting, the word usually refers to the process by which the taxing authority assigns a taxable value to real or personal property. See, e. g., F. Schoettle, State and Local Taxation: The Law and Policy of Multi-Jurisdictional Taxation 799 (2003) ("ASSESSMENT—The process of putting a value on real or personal property for purposes of a tax to be measured as a percentage of property values. The valuation is ordinarily done by a government official, the `assessor' or `tax assessor,' who will sometimes hire a private professional to do the actual valuations."); Black's Law Dictionary 112 (7th ed. 1999) (defining "assessment" as, inter alia: "Official valuation of property for purposes of taxation .—Also termed tax assessment. Cf. APPRAISAL."). See also 5 R. Powell, Real Property § 39.02 (M. Wolf ed. 2000). To calculate the amount of property taxes owed, the tax assessor multiplies the assessed value by the appropriate tax rate. See, e. g., R. Werner, Real Estate Law 534 (11th ed. 2002). Income taxes, by contrast, are typically self-assessed in the United States. As anyone who has filed a tax return is unlikely to forget, the taxpayer, not the taxing authority, is the first party to make the relevant calculation of income taxes owed. The word "self-assessment," however, is not a technical term; as IRC § 6201(a) indicates, the IRS executes the formal act of income-tax assessment.

I don't think that really adds to the resolution of the issue of whether, for purposes of the abatement discussion, tax assessments and FBAR assessments are sufficiently similar (or indeed the same) for purposes of the issue addressed in Horowitz.  

However, I do think the FBAR assessment is sufficiently like the tax assessment in the key feature -- a formal recording of the liability so that collection action can commence (for tax assessments, use of the IRS's collection tools such as liens and levies; for FBAR assessments, use of the principal collection tool, suit within two years) -- that the tax authority should apply.